I’m the Washington D.C. bureau chief for Forbes and have worked in the bureau for more than two decades. I've spent much of that time reporting about taxes -- tax policy, tax planning, tax shelters and tax evasion. These days, I also edit the personal finance coverage in Forbes magazine and coordinate outside tax, retirement and personal finance contributors to Forbes.com. You can email me at jnovack@forbes.com and follow me on Twitter @janetnovack.

Insurance Agent To Forbes 400 Concedes Understating Taxable Income By $50 Million

The Bombardier Challenger 604, what an insurance agent to the Forbes 400 drives. (Photo credit: Wikipedia)

When the chartered airplane that was to fly him from Orange County, Cal. to Wichita, Kan. didn’t show up, life insurance super-agent Michael D. Brown missed his scheduled meeting with David Koch and Charles Koch, the billionaire brothers who control Koch Industries, losing out on a potential $8 million commission. After that episode, Brown told the U.S. Tax Court last year, he realized that as an insurance agent to the Forbes 400—someone who had made as much as $17 million from a single insurance sale—he needed his own jet.

But the Hawker he bought couldn’t fly nonstop from California to New York, where the most billionaires reside, and so Brown started shopping for a big-boys jet. He stepped up his search in May 2003, when, as part of the second round of Bush tax cuts, Congress enacted a special bonus depreciation for certain property placed in service before Dec. 31, 2004. Through PrivatAir, Brown identified a $22 million BombardierBombardier Challenger 604 that fit the bill, and, having had a particularly lucrative 2003, rushed to place the jet in service and claim an $11 million bonus depreciation deduction for 2003.

In a 54-page decision issued today, complete with references to F. Scott Fitzgerald, Ernest Hemingway and the Forbes 400, U.S. Tax Court Judge Mark V. Holmes ruled that the new jet wasn’t really put in service until 2004 because Brown was awaiting modifications, including installation of a conference table. But the opinion also includes some juicier details: the government, Holmes noted, contended that Brown had grossly understated his income by tens of millions and had “claimed fraudulent consulting-fee deductions, used nominees to conceal ownership and control of entities from the IRS, and created many false documents in an attempt to support illegitimate deductions.”

In May 2012, just a week before the trial over all those claims was to begin, Brown settled every issue but the jet with the government. According to Holmes’ opinion, Brown agreed that his taxable income for 2001 to 2006 should be adjusted upwards by more than $50 million, and that $10 million of those adjustments would be subject to the (rarely imposed) 75% penalty for civil fraud. The total bill: more than $20 million in back taxes and penalties. Brown’s lawyer, Michael C. Cohen of DeCastro, West, Chodorow, Mendler, Glickfeld & Nass in Los Angeles, said Tuesday that he and his client had just received the decision and had no comment at this point.

Brown gained fame beyond the small world of big dollar insurance deals in 2002, when TheNew York Timesreported that he and New York trusts and estate lawyer Jonathan G. Blattmachr (then with Milbank, Tweed, Hadley & McCloy) had devised a way that the nation’s rich could transfer hundreds of millions of dollars estate and gift tax free by exploiting a loophole in IRS regulations. Three weeks later, the IRS issued a notice disallowing the ploy.

In his opinion, Holmes, a Harvard College and University of ChicagoLaw School grad appointed to the Tax Court by President George W. Bush, couldn’t resist putting Brown in literary and class perspective, writing:

Fitzgerald asserted that “the very rich * * * are different from you and me.” ….Hemingway replied that “[t]he very rich are different from you and me. * * *[T]hey have more money.”…The facts of this case show that both statements are true: The very rich have much more money and they can use it to do things with insurance that most people can’t. Brown has built his career on figuring out how to help the very rich do these things.

Among other things, the opinion notes, Brown wrote no policies for less than $10 million in insurance and had built up a national network of accountants and insurance agents who, if they “identified a Forbes 400 member pursuing an insurance program’’ would call Brown in and then share in his commission if he closed the deal.

The decision wasn’t a total loss for Brown. Holmes rejected a bid by the government to slap the 75% fraud penalty on Brown for his premature deduction of the $22 million jet, finding only a 20% accuracy penalty was warranted since Brown had shown “that he actually believed that he completed all of the steps necessary” to treat the plane as put in service in 2003. Specifically, Brown took possession of it on Dec. 30, 2003, for one day, and had his pilot fly him from Portland to Seattle for a business lunch and then to Chicago to meet and have a pizza with another insurance agent he had mentored. (Later, Brown had his CFO/CPA present the Chicago agent with a letter to sign suggesting he was the one who wanted the “vital” last minute meeting.) After logging 4,000 miles on this plane on Dec. 30th, Brown flew on his old private jet back to Cabo San Lucas to rejoin his vacationing family for New Year’s.

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I suppose it depended on whether or not those alterations where in the plans fromthe beginning or later decided on. After all capital improvements are allowed to any asset already in use. I bet they found he had booked these changes but interest case for sure more audits of wealthy should be done :)

10% income tax on any type of income (individual, business, corporate, capital gains, etc.) with first $30,000 exempt per individual – no other deductions beyond business expenses., i.e. married couples (gay or straight) would exempt $60,000 – no marriage discrimination. 10% national sales tax with every tax filer getting up to $3,000 check from gov’t to exempt up to 1st $30,000 (based on previous year filed taxed return). The unreported cash economy is huge! 10% net worth tax on individual assets above $1.1 billion including charities owned/controlled by an individual (they build themselves buildings and put their art collections in them with lavish perks for themselves.) Now that is progressive! So Bill Gates has personal NW of $54 billion plus controls his charity of $25 billion, so he would owe a tax of $7.9 billion on his $79 billion. Every year until he gets to $1.1 billion! Warren Buffet said that once you reach $500 million in NW there is pretty much nothing you can’t buy. With the exemption of $1.1 billion Bill Gates and the like will still have plenty of NW left to rule the world! Think of it like property taxes on your house. 10% inheritance tax above $10 million – eliminate all trusts and other tax dodges. Limit the tax code to 100 pages. It may have to be small 7pt font, but the current version is written for the Forbes 400. Ten percent is easy to calculate!

Let’s see, President Obama makes $5.4 million in income according to his own tax return and pays a mere 20% (truncated) effective tax rate while supporting a system for “millionaires and billionaires to pay their fair share” of 39.6%.

I and 4 of my work colleagues earn about 4% of what President Obama makes and pay between 25% and 27% effective tax rates. In the government parlance – this is called “fairness.”

The interesting thing about these and other tax schemes is that the people who prepare and maintain the code do so to ensure their income is not taxed as much, although those who have little say get taxed to the hilt. While under reporting income by $50 million is not acceptable, we forget that those who get sent to Washington DC report their income, but write so many self serving loopholes into the law, they don’t pay much in tax either. Janet, please expose this garbage.

Typical sensationalist journalism. He was not accused of understating his income. He had $50 of deductions disallowed. This article is accusing him of a felony that the IRS did not accuse him of. Come on Forbes, what has happened to you?

As the headline clearly states, he understated his TAXABLE income by $50 million, which is indeed the effect of claiming fabricated, inflated, or unsubstantiated business expenses. Nowhere does this story say he was charged with a crime. It does point out, however, that $10 million of his understated income was subject to the civil fraud penalty—a highly significant concession on his part.

Okay, let me make it explicit for you. I totally dispute that this is sensationalist journalism. Over the past two decades I have looked at thousands of Tax Court and U.S. District Court tax cases and I can tell you that conceding $50 million in additional taxable income is a very big deal.

The Tax Court case was wrongly decided and should be appealed. The 9th Circuit will have the advantage of dealing with a single issue, and is not as likely to be swept away by fictional characters and questions of financial inequality.